Selling Your House for a Profit? You May Qualify for an Exclusion on Capital Gains Tax

A lot of people have a false assumption they have to pay capital gains tax on their house if they make a profit on it. According to the IRS (as of January 5th, 2019), you may exclude up to $250,000 dollars of gain if you file single or up to $500,000 if you file joint with your spouse, as long as you meet their criteria which I will mention later.

That means if you buy, for example, a $250,000 house and sell it for $750,000 you can keep that gain in your pocket as long as you file joint with your spouse.

Now let’s get to the important part, the criteria.

IRS Section 121 Exclusion Criteria

You must have used the house as your main house for two of the past five years before the sale. That doesn’t mean you need to have owned it for five years, it just means you must have used it as your main home for two of the past five years before the sale date of the property.

It logically follows that you generally could not have claimed this exclusion on a different property less than two years prior to the sale date. <See IRS Publication 523>

This general rule does not apply to certain situations including government assignments (military, intelligence, etc) and they can extend that five year window out further to ten years.

How does the IRS determine your “main” home?

US Postal Service Address

Federal and State Tax Return Address

Drivers License Address

They may also consider other information including:

Where you work

Where you bank

Disqualifiers

You can not have acquired the property through a 1031 exchange. <See Investopedia for more information about 1031 exchanges>

You cannot be subject to expatriate tax. This is a tax on US citizens renouncing their citizenship.

Partial Exclusion

The IRS allows for partial exclusion under the following circumstances:

Work related moves

New work location more than 50 miles further from home

Health related moves

Move to take care of relative

Move based on doctor recommendation

Unforeseeable events

Disaster

Deaths

Of owner(s)

Birth of Two or more children

Home Destruction

Act of Terrorism on Property

Other Things to Remember

Even though this is a great exclusion written in the tax code, it could change! Make sure to double check the rules when you do end up selling your house for profit. Also, keep in mind that some of your closing costs in buying the property can go into the cost basis for the house – keep those records! Lastly, make sure to report the sale to the IRS – even though you may qualify for a complete exclusion.

REITS are Eating Homes

“The American dream no longer includes homeownership,” said Jordan Kavana, chief executive of Transcendent Investment Management LLC. Transcendent Investment Management is buying up rental homes, and expects Americans to transition into all being renters to drive profits for his and other similar companies.

This type of corporate incursion into housing was popular back in 2013 when houses were dirt cheap, but it’s starting to ramp up yet again. A few publicly traded companies involved in this type of business include Blackstone (BX), and American Homes 4 Rent (AMH). American Homes 4 Rent has been the largest player in the single family homes arena until Blackstone and Starwood properties merge their operations to join Blackstone’s existing single family division Invitation Homes (INVH). The merger will see Invitation Homes landlord almost 100,000 single family homes spread across the United States.

The Giants are Coming

These massive REITs may be part of some of your 401k mutual funds already, and are driving up prices for single families and potentially forcing them to buy more expensive homes. This is not unexpected due to the historically low interest rate the US still supports – and the benefits that come with scaling up operations. My problem with this is that by investing in these REITs you could be inadvertently encouraging Wall Street investors to drive up home prices around you putting the younger generation at more risk of lifelong homelessness (you get what I’m saying).

Traditionally most REITs focused on multifamily apartment buildings, we shall see how this foray into single family housing impacts the US economy for years to come. For millennials, this does not bode well for their home ownership prospects. I would prefer to be an owner of my own residential property than invest in these types of REITs, and if anything I would stick to multi-family apartment focus REITs as they should yield better returns. For more information on REITs and how to make money on real estate, check out my real estate page.

It used to be 9.95 per trade, then 8, and now 4.95. Commissions can add up and suck the profitability out of your stock portfolio, especially if you want to make multiple trades per year or had in mind to trade in smaller batches of shares.

Robinhood has leveled the playing field with $0 commissions on trades. You can check out Robinhood at https://robinhood.com from your smartphone to sign up. You can also ask someone who already has Robinhood to give you a referral link and you both will receive a free share (usually of a cheap stock).

I personally like using Robinhood the most for option trades, where commissions really eat into my profitability especially if the options only cost under $100. The tools to research are missing from Robinhood so you will have to find some other tool to do your stock research before trading. Regarding the tools I like Fidelity and Charles Schwab better.

What’s Going On?

Activision Blizzard came out with their Q1 2018 earning reports exceeding estimates by over 10%. Despite Fortnite and PUBG claiming much gaming market share over that same period, it appears it hasn’t pushed people into abandoning their World of Warcraft subscriptions or uninstalling Call of Duty.

I’ve been a long time holder of this company, and do not plan on selling anytime soon. Even though the dividend rate is on the low side (34 cents this past quarter), their revenue climbed over 13% for the same quarter last year.

Potential trades:

Write (Sell) put option for June 22 at $70.5 dollars per share at $2.00 per option. As long as ATVI does not go below $68.5 by June 22, 2018 you will be better off for it. If the price goes below that point then you will be forced to buy shares at that price, which I still think is a good thing long term. Otherwise, I’d put this stock on a watchlist and buy long if the shares go under $69. With the volatile stock market of the past few months this will probably happen and give you a nice discount on a great company.

Current trading price of ATVI: $71.66

Other Thoughts

While EA Games is also a profitable company which looks good on paper, as a gamer myself I’d have to say that EA has thrown many gamers under the bus with their pay as you go, or pay for item strategy. It’s hard to imagine the frustration seeing items for sale in a game after you’ve already paid between $60 to $80 for a AAA game. EA Games helped create the in-game content purchase model, which unfortunately has spilt to other developers.

Ford is entering dangerously cheap territory. P/E ratio of 6, dividend ratio of over 5%, and healthy return on equity. Either someone knows something the financials are not telling us, or people are worried they can’t catch up to newer car companies and their technologies. I’ve got an idea for Ford, buy back some shares while your stock price is so cheap. I think the news of releasing the Bronco and Ranger again in the US is a great one, and there is positive news out of China of Ford starting to make EV there through a 50/50 joint venture with Zotye Auto (Chinese company), in addition to it’s existing joint venture Changan Ford. That being said, Ford’s China market is still much lower than GM’s.

I am long Ford with a few Call options expiring in June @ 11.87 / share. I still think Ford will be a better investment at the current price of 11.36 (Jan. 29, 2018) than Tesla at 341.50. Tesla has extreme leadership but I think they have over-promised at this point and due for a correction. I am also long GM which has a favorable P/E ratio of 9.44 and dividend of 3.48%. Tesla currently has no dividend and is not a profitable company.

A lot of talk is going on about the VIX, also known as the CBOE Volatility Index. This index will track and correspond to the market’s expectation of 30 day volatility. What does that even mean?

I can show you how to make your own volatility bet by using options for a single company. For example Ford.

Ford is one of those companies that I believe will either prove itself as relevant in the coming years or fade into obscurity.

So I can make a bet that Ford will be either go past 15 dollars or slide down past 8 dollars by January 18th, 2019. For a relatively low bet of just 32 dollars I can make a decent profit if the stock dips below

Option Spread

Ford Spread Profit Chart

Stock Price

Strike Price C

Strike Price P

Option Cost

Gain

Profit

0

15

8

32.00

800

768.00

1

15

8

32.00

700

668.00

2

15

8

32.00

600

568.00

3

15

8

32.00

500

468.00

4

15

8

32.00

400

368.00

5

15

8

32.00

300

268.00

6

15

8

32.00

200

168.00

7

15

8

32.00

100

68.00

8

15

8

32.00

0

-32.00

9

15

8

32.00

0

-32.00

10

15

8

32.00

0

-32.00

11

15

8

32.00

0

-32.00

12

15

8

32.00

0

-32.00

13

15

8

32.00

0

-32.00

14

15

8

32.00

0

-32.00

15

15

8

32.00

0

-32.00

16

15

8

32.00

100

68.00

17

15

8

32.00

200

168.00

18

15

8

32.00

300

268.00

19

15

8

32.00

400

368.00

20

15

8

32.00

500

468.00

21

15

8

32.00

600

568.00

22

15

8

32.00

700

668.00

23

15

8

32.00

800

768.00

24

15

8

32.00

900

868.00

Another option strategy that makes people feel better about themselves since they will almost always get something back, but costs more, is called a “straddle”. A straddle, in this case with Tesla, is a bet that the stock price deviates from a certain point. In the figure below, a bet is being placed that the price of TESLA will deviate away from $350 per share by January 18, 2018. The price looks big, $10,765 for this particular strategy. But look below and you will see the profit loss chart shows that nears $200 or goes over $430 per share you will start making money again. This particular example I would not trade because the option prices are too high.

Option Straddle

Tesla Straddle $350 Profit Chart

Stock Price

Strike Price

Option Cost

Gain

Profit

0

350

10,765.00

35000

24,235.00

10

10,765.00

34000

23,235.00

20

10,765.00

33000

22,235.00

30

10,765.00

32000

21,235.00

40

10,765.00

31000

20,235.00

50

10,765.00

30000

19,235.00

60

10,765.00

29000

18,235.00

70

10,765.00

28000

17,235.00

80

10,765.00

27000

16,235.00

90

10,765.00

26000

15,235.00

100

10,765.00

25000

14,235.00

110

10,765.00

24000

13,235.00

120

10,765.00

23000

12,235.00

130

10,765.00

22000

11,235.00

140

10,765.00

21000

10,235.00

150

10,765.00

20000

9,235.00

160

10,765.00

19000

8,235.00

170

10,765.00

18000

7,235.00

180

10,765.00

17000

6,235.00

190

10,765.00

16000

5,235.00

200

10,765.00

15000

4,235.00

210

10,765.00

14000

3,235.00

220

10,765.00

13000

2,235.00

230

10,765.00

12000

1,235.00

240

10,765.00

11000

235.00

250

10,765.00

10000

-765.00

260

10,765.00

9000

-1,765.00

270

10,765.00

8000

-2,765.00

280

10,765.00

7000

-3,765.00

290

10,765.00

6000

-4,765.00

300

10,765.00

5000

-5,765.00

310

10,765.00

4000

-6,765.00

320

10,765.00

3000

-7,765.00

330

10,765.00

2000

-8,765.00

340

10,765.00

1000

-9,765.00

350

10,765.00

0

-10,765.00

360

10,765.00

1000

-9,765.00

370

10,765.00

2000

-8,765.00

380

10,765.00

3000

-7,765.00

390

10,765.00

4000

-6,765.00

400

10,765.00

5000

-5,765.00

410

10,765.00

6000

-4,765.00

420

10,765.00

7000

-3,765.00

430

10,765.00

8000

-2,765.00

440

10,765.00

9000

-1,765.00

450

10,765.00

10000

-765.00

460

10,765.00

11000

235.00

470

10,765.00

12000

1,235.00

480

10,765.00

13000

2,235.00

490

10,765.00

14000

3,235.00

500

10,765.00

15000

4,235.00

510

10,765.00

16000

5,235.00

520

10,765.00

17000

6,235.00

530

10,765.00

18000

7,235.00

540

10,765.00

19000

8,235.00

550

10,765.00

20000

9,235.00

560

10,765.00

21000

10,235.00

570

10,765.00

22000

11,235.00

580

10,765.00

23000

12,235.00

590

10,765.00

24000

13,235.00

600

10,765.00

25000

14,235.00

610

10,765.00

26000

15,235.00

620

10,765.00

27000

16,235.00

630

10,765.00

28000

17,235.00

640

10,765.00

29000

18,235.00

650

10,765.00

30000

19,235.00

660

10,765.00

31000

20,235.00

670

10,765.00

32000

21,235.00

680

10,765.00

33000

22,235.00

690

10,765.00

34000

23,235.00

700

10,765.00

35000

24,235.00

Someone may have told you that in Blackjack insurance is a suckers bet, but if you ever looked into the counting strategy then in certain situations you should take the insurance. Currently I am only buying and writing call options at the time of this article and not utilizing spreads or straddles and have no intention of doing so in the next week or so. While the screenshots above are using market order types I strongly suggest to always trade using the limit order type on all option trades.

I’ve talked to a lot of co-workers and relatives who have invested heavily in businesses they simply don’t understand. This is a mistake.

You don’t have to know everything there is to know about a company to invest in it, but you should have a general understanding of their products and market. Warren Buffet famously invested in Coca-Cola since 1987 and currently owns around 10% of Coke stocks. He loved this company because of its iconic name, and well known product. He found a company he knew and understood and was able to make sizable returns on his investment. Coke stocks went up from $2.45 per share in 1988 to it’s current price of $47.38, paying good dividends along the way. Walmart, Best Buy, and Kroger are all publicly listed companies that any average Joe can understand.

Walmart 5 year return: 72.5%

Best Buy 5 year return: 490.8%

Kroger 5 year return: 132.7%

If you’re a gamer you know names like Activision Blizzard, responsible for games such as World of Warcraft, Call of Duty, etc. which all have their own cult following. If you bought this company 5 years ago and held it you would return 555% on your investment. Walmart and Kroger are included as examples of companies that have stiff price competition and do not have an “economic moat” such as a company like Activision Blizzard. Best Buy has been a go-to place for electronics and has been well positioned to capture what I call the Apple Tech revolution, not having to deal with rivals that have gone under such as Circuit City and Ultimate Electronics.

Now companies that you don’t understand, stay away from! For example, “exploratory mining companies”, small no-name drug companies, and Greek shipping companies are all stock investor pitfalls that usually end up going bankrupt. This is why for all of my serious investments I make sure the company has at least a 400 million market capitalization. You can certainly play with penny stocks, but I’d never suggest putting any amount you can’t lose into them. It’s my same advise with gambling at a casino.

Now you may be asking, “I knew Circuit City and their products, but those lost money!”. You’re right! Besides knowing the business you also have to do some research on the company’s cash flow and growth. Those are outside the scope of this article, as the “secret sauce” for successful investors is largely dependant on their cash flow figures in comparison with this stocks outstanding and stock price.

Everyone knows that Real Estate is one of the major ways to make income. Like stocks, you have to put money in to get a return which will either be positive or negative. Unlike stocks, it isn’t so simple to figure out how much your return is. Online brokerages like Fidelity, Merrill Edge, and Charles Schwab have nifty graphs and reports that can tell you exactly how well you’re doing over a specified time frame.

If you have considered buying a real estate property, measuring your return is one of the most important factors to identify your successes and failures. I found a great video by BiggerPockets.com which goes through the process in a simple way that will help you manually compute your return on investment. Of course, as you build your real estate portfolio it is important to find a good way to keep all the information together which can be done using a myriad of tools out there.

Black Friday may mean a black eye for some shoppers. Black Friday deals are a recipe for violence in many parts of the US, and while I can’t deny this is unacceptable, I will comment that it is more common around the world than you might think.

Why do large defence contractors, for example Lockheed Martin (NYSE: LMT), make billions of dollars per year? What makes these types of companies fabulous investments? Conflict. Conflict around the world is essentially either fought for dominance of a certain group of people for a certain set of resources. Resources can be land size, energy, food, manpower, etc.

Black Friday is creating mini wars in parts of the United States where resources are scarce, generally speaking those who get involved in brawls really need these black Friday deals as their chance to get a unit of a limited supply of something – PS4, XBox, Flatscreen TV, etc. If you make people have to compete to get the resources, fights will happen.

The following is a list of a few mining stocks to consider coming into 2018. Some investors are eyeing mining stocks as an unappreciated sector in the past few years, and are looking to diversify their portfolio from overpriced stocks to some bargains. I have reallocated some gains from 2017 into the first option below in anticipation for a gold price increase to follow the recent commodity price increases. Please comment below if you have any other suggestions.

Barrick Gold (Nasdaq: ABX) – the largest gold mining company in the world. With a PE Ratio (TTM) of only 7.00 trading at $14.00 this is a steal. The dividend is weak though, so the hope would be that the gold price rises or they can cut expenses and improve efficiency. This would probably be one of your best bets on gold prices. With the US dollar starting to decline against other currencies and commodity prices starting to rise this stock is essentially a bet on gold. The expected output of gold in 2017 is 5.3 million ounces and the expected output of copper is 420 million pounds. The size of the company means it is more likely to be able to weather an extended gold price trough. Another positive is that this company has not issued more shares for the past few years, meaning they are less likely to dilute the price. The drawback to this company is that is heavily dependant on gold and copper mining, so more or less betting on these two commodities. Today’s price is $14.00.

GoldCorp (Nasdaq: GG) – another Canadian company, GoldCorp is essentially a smaller version of Barrick with a higher pricetag. GoldCorp estimates to mine 2.5 million ounces of gold in 2017 but claims to have plans to grow by 20% by 2021. If you want to invest in gold miners and want to spread across multiple companies, you can consider buying some of this stock. Today’s price is $13.22.

BHP Billiton Limited (Nasdaq: BHP) – The world’s largest mining company. We aren’t talking gold – we are talking coal, iron, copper, potash, and petroleum. This company currently has a “average” P/E (TTM) ratio of 19, but boasts and excellent dividend of 1.72 or 4.1%. Today’s price is $42.30. Investing in this company is sort of like investing in the global economy, as the raw materials are used around the world. This company was hit by the economic slowdown of 2008, falling to $36, but then peaked in 2013 at over $94 per share. From 2011 to the end of 2015 the shares slowly slipped down to $22 per share but have since risen to their current price of $42.29.

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